Asset protection trusts and family trusts

As asset protection trust is a type of trust whereby the beneficiaries’ interest in the trust is not fixed but dependent on the discretion of the trustees.

Thus, a claim by a creditor against a beneficiary of an asset protection trust has no better claim to the interest than the beneficiary himself, provided the beneficiary is not also the sole trustee, which can create problems. There must therefore be a loss of control over the asset by the transferor in order to maximize protection.

Note, however, that transferring assets to a trust once a bankruptcy or a seizure is imminent is not an effective solution.

For tax purposes, it is important to determine whether the transfer of the assets at fair market value will result in tax consequences, such as the realization of accrued capital gains for example. If so, the Income Tax Act provides a few exceptions to this rule, these are:

Spousal trusts

Joint partner trusts

Alter ego trusts

The choice will be made based on the age, marital status and other objectives of the transferor.

If the transfer of the asset does not result in the realization of any tax consequences, the principal residence for example, then more latitude is possible in order to maximize the protection offered by the trust.

Generally, an asset protection trust does not confer the same tax advantages as other forms of trusts.

Family trusts

A family trust is very useful as a tax-planning tool. Normally, the family trust will hold the shares in the family business. Some of the advantages are:

Income splitting between many beneficiaries such as children over 18, spouse, parents, etc.

Multiplication of the capital gains exemption in the event of the sale of the business.

Facilitating an estate freeze (the transfer of the future value to the next generation) if the older generation wishes to retain control over the shares.

There are numerous other advantages and the set up will depend largely on the objectives and needs of the client.